Lululemon Breaks Out to Fresh Highs, but Are Shares Oversold?

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Lululemon Athletica Inc. (LULU) shares rose more than 2.3% on Wednesday, joining other clothing retailers buoyed by the fourth-quarter earnings news from Ralph Lauren Corporation (RL). The Polo brand clothier reported gross margins improved from 55.4% to 59.8% year over year due to a higher mix of full-price sales. Ralph Lauren stock soared more than 14%, pulling up the shares of Lululemon, Fossil Group, Inc. (FOSL) and PVH Corp. (PVH).

Many analysts have also been bullish on Lululemon over the past week. On Monday, SunTrust analysts raised their price target from $95.00 to $114.00, citing sales momentum and an inventory-to-sales ratio that was among the lowest in its peer group. On Tuesday, Stifel analysts raised their price target from $81.00 to $97.00, saying that investors are anticipating strong first quarter financial results and that Lululemon is likely to deliver. (See also: Lululemon Stock Stretches Toward High on Earnings.)

Traders should watch for a breakout from R1 resistance at $104.70 to upper trendline and R2 resistance at $109.59 on the upside. If the stock moves lower, traders should watch for trendline support levels at around $101.00 to hold. A breakdown from these levels could send the stock down to the pivot point and reaction lows at $95.67. Of course, traders will also be keeping an eye on first quarter earnings coming up later this month. (For additional reading, check out: Understanding Lululemon’s Business Model.)

Chart courtesy of StockCharts.com. The author holds no position in the stock(s) mentioned except through passively managed index funds.

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